UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





x           Quarterly
Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934





For the
quarterly period ended June 30, 2009





OR





 ̈           Transition Report Pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934


For the
transition period from __________ to __________





Commission
File Number 001-14015





APPLIED
ENERGETICS, INC.


________________________________________________________________________________


(Exact
Name of Registrant as Specified in Its Charter)





Delaware
              
              
              
              77-0262908(State
      or Other Jurisdiction of Incorporation or Organization)
              
              
              
              (IRS
      Employer Identification
Number)





3590
      East Columbia StreetTucson,
      Arizona
              85714(Address
      of Principal Executive Offices)
              (Zip
      Code)





Registrant’s
telephone number, including area
code          (520)
628-7415





Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes x No  ̈





Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every interactive data file required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files).


Yes  ̈ No  ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company.  See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.  (Check one):





Large
      accelerated filer:  ̈
                
                Accelerated
      filer: x
                
                Non-accelerated
      filer:  ̈
                
                Smaller reporting company:  ̈


(Do not
check if a smaller reporting company)




Indicate
by check mark whether the Registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)Yes o No x





Indicate
the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date. As of August 5, 2009, there were
86,424,948 shares of the issuer's common stock, par value $.001 per share,
outstanding.








APPLIED
ENERGETICS, INC.


QUARTERLY
REPORT ON FORM 10-Q


TABLE
OF CONTENTS





PART
      I.  FINANCIAL INFORMATIONITEM
      1.
                                                                                    Condensed
      Consolidated Financial Statements
                                                                                    1Condensed
      Consolidated Balance Sheets as of June 30, 2009 (Unaudited) and December
      31, 2008
                                                                                    1Condensed
      Consolidated Statements of Operations for the three months ended June 30,
      2009 and 2008 (Unaudited)
                                                                                    2Condensed
      Consolidated Statements of Operations for the six months ended June 30,
      2009 and 2008 (Unaudited)
                                                                                    3Condensed
      Consolidated Statements of Cash Flows for the six months ended June 30,
      2009 and 2008 (Unaudited)
                                                                                    4Notes
      to Condensed Consolidated Financial Statements
                                                                                    5ITEM
      2.
                                                                                    Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                                                                    12ITEM
      4.
                                                                                    Controls
      and Procedures
                                                                                    17PART
      II.  OTHER INFORMATIONITEM
      1.
                                                                                    Legal
      Proceedings
                                                                                    18ITEM
      6.
                                                                                    Exhibits
                                                                                    18SIGNATURES
                                                                                    19




i





PART
I.  FINANCIAL INFORMATION





ITEM
1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS





APPLIED
      ENERGETICS, INC.CONDENSED
      CONSOLIDATED BALANCE SHEETSJune 30, 2009
                
                
                December 31, 2008(Unaudited)ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                13,235,875
                
                
                $
                15,467,386Accounts
      receivable
                
                
                1,182,470
                
                
                
                2,727,853Inventory
                
                
                271,006
                
                
                
                157,189Prepaid
      expenses and deposits
                
                
                207,955
                
                
                
                495,718Insurance
      receivable
                
                
                5,654,695
                
                
                
                12,788Other
      receivables
                
                
                269,032
                
                
                
                4,395Total
      current assets
                
                
                20,821,033
                
                
                
                18,865,329Long
      term receivables - net
                
                
                -
                
                
                
                253,130Property
      and equipment - net
                
                
                3,049,782
                
                
                
                3,523,641Intangible
      assets – net
                
                
                12,300
                
                
                
                36,900Other
      assets
                
                
                10,000
                
                
                
                29,089TOTAL
      ASSETS
                
                $
                23,893,115
                
                
                $
                22,708,089LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilitiesAccounts
      payable
                
                $
                429,573
                
                
                $
                883,228Estimated
      loss on uncompleted contract
                
                
                -
                
                
                
                98,239Accrued
      expenses
                
                
                288,883
                
                
                
                326,697Litigation
      settlement liability
                
                
                5,525,000
                
                
                
                -Accrued
      compensation
                
                
                1,067,466
                
                
                
                1,048,774Customer
      deposits
                
                
                236,248
                
                
                
                11,565Billings
      in excess of costs
                
                
                21,533
                
                
                
                -Current
      portion of capital lease obligations
                
                
                -
                
                
                
                2,028Total
      current liabilities
                
                
                7,568,703
                
                
                
                2,370,531Litigation
      settlement liability - LT
                
                
                1,200,000
                
                
                
                -Deferred
      rent
                
                
                -
                
                
                
                4,049Total
      liabilities
                
                
                8,768,703
                
                
                
                2,374,580Commitments
      and contingenciesStockholders’
      equitySeries
      A Convertible Preferred Stock, $.001 par value, 2,000,000 shares
      authorized;135,572 shares issued and outstanding at June 30, 2009 and at
      December 31, 2008
                
                
                136
                
                
                
                136Common
      stock, $.001 par value, 125,000,000 shares authorized; 86,424,948 shares
      issued and outstanding at June 30, 2009 and 86,370,026 shares issued and
      outstanding at December 31, 2008
                
                
                86,425
                
                
                
                86,370Additional
      paid-in capital
                
                
                75,034,952
                
                
                
                73,936,085Accumulated
      deficit
                
                
                (59,997,101
                )
                
                
                (53,689,082
                )Total
      stockholders’ equity
                
                
                15,124,412
                
                
                
                20,333,509TOTAL
      LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                $
                23,893,115
                
                
                $
                22,708,089





See
accompanying notes to condensed consolidated financial statements
(unaudited)


- 1
-





APPLIED
      ENERGETICS, INC.CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)





For the three months ended
                  June 30,2009
                
                
                2008Revenue
                
                $
                1,730,141
                
                
                $
                5,677,998Cost
      of revenue
                
                
                1,631,316
                
                
                
                5,189,454Gross
      profit
                
                
                98,825
                
                
                
                488,544Operating
      expenses:General
      and administrative
                
                
                2,825,062
                
                
                
                1,157,277Selling
      and marketing
                
                
                191,001
                
                
                
                72,854Research
      and development
                
                
                322,986
                
                
                
                243,272Total
      operating expenses
                
                
                3,339,049
                
                
                
                1,473,403Operating
      loss
                
                
                (3,240,224
                )
                
                
                (984,859
                )Other
      (expense) income:Interest
      expense
                
                
                -
                
                
                
                (239
                )Interest
      income
                
                
                16,807
                
                
                
                165,780Total
      other
                
                
                16,807
                
                
                
                165,541Net
      loss
                
                
                (3,223,417
                )
                
                
                (819,318
                )Preferred
      stock dividends
                
                
                (55,076
                )
                
                
                (282,220
                )Net
      loss attributable to common stockholders
                
                $
                (3,278,493
                )
                
                $
                (1,101,538
                )Net
      loss per common share – basic and diluted
                
                $
                (0.04
                )
                
                $
                (0.01
                )Weighted
      average number of shares outstanding, basic and diluted
                
                
                86,137,728
                
                
                
                80,594,626





See
accompanying notes to condensed consolidated financial statements
(unaudited)


- 2
-





APPLIED
      ENERGETICS, INC.CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(Unaudited)





For the six months ended
                  June 30,2009
                
                
                2008Revenue
                
                $
                4,317,539
                
                
                $
                7,639,088Cost
      of revenue
                
                
                4,032,763
                
                
                
                6,929,562Gross
      profit
                
                
                284,776
                
                
                
                709,526Operating
      expenses:General
      and administrative
                
                
                5,260,785
                
                
                
                4,522,741Selling
      and marketing
                
                
                429,024
                
                
                
                111,438Research
      and development
                
                
                840,647
                
                
                
                605,210Total
      operating expenses
                
                
                6,530,456
                
                
                
                5,239,389Operating
      loss
                
                
                (6,245,680
                )
                
                
                (4,529,863
                )Other
      (expense) income:Interest
      expense
                
                
                (19
                )
                
                
                (1,552
                )Interest
      income
                
                
                47,834
                
                
                
                415,608Other
                
                
                -
                
                
                
                10Total
      other
                
                
                47,815
                
                
                
                414,066Net
      loss
                
                
                (6,197,865
                )
                
                
                (4,115,797
                )Preferred
      stock dividends
                
                
                (110,152
                )
                
                
                (577,311
                )Net
      loss attributable to common stockholders
                
                $
                (6,308,017
                )
                
                $
                (4,693,108
                )Net
      loss per common share – basic and diluted
                
                $
                (0.07
                )
                
                $
                (0.06
                )Weighted
      average number of shares outstanding, basic and diluted
                
                
                86,201,037
                
                
                
                80,499,620





See
accompanying notes to condensed consolidated financial statements
(unaudited)


- 3
-





APPLIED
      ENERGETICS, INC.CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(Unaudited)





For
      the six months ended
                    June
      30,2009
                  
                  
                  2008CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                  
                  $
                  (6,197,865
                  )
                  
                  $
                  (4,115,797
                  )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Depreciation
      and amortization
                  
                  
                  389,351
                  
                  
                  
                  480,206Loss
      on equipment disposal
                  
                  
                  105,841
                  
                  
                  
                  -Deferred
      rent adjustment on purchase of premises
                  
                  
                  -
                  
                  
                  
                  118,594Provision
      for losses on projects
                  
                  
                  22,000
                  
                  
                  
                  -Non-cash
      stock based compensation expense
                  
                  
                  1,098,923
                  
                  
                  
                  2,302,255Changes
      in assets and liabilities:Accounts
      receivable
                  
                  
                  1,545,383
                  
                  
                  
                  (2,065,666
                  )Insurance
      receivable
                  
                  
                  (5,641,907
                  )
                  
                  
                  -Other
      receivable
                  
                  
                  (264,637
                  )
                  
                  
                  (66,948
                  )Inventory
                  
                  
                  (234,056
                  )
                  
                  
                  (523,012
                  )Prepaid
      expenses and deposits
                  
                  
                  306,852
                  
                  
                  
                  224,054Long
      term receivables - net
                  
                  
                  253,129
                  
                  
                  
                  -Accounts
      payable
                  
                  
                  (453,655
                  )
                  
                  
                  (559,033
                  )Litigation
      settlement liability
                  
                  
                  5,525,000
                  
                  
                  
                  -Billings
      in excess of costs
                  
                  
                  21,533
                  
                  
                  
                  197,455Accrued
      expenses, deposits and deferred rent
                  
                  
                  1,401,510
                  
                  
                  
                  (440,783
                  )Net
      cash used in operating activities
                  
                  
                  (2,122,598
                  )
                  
                  
                  (4,448,675
                  )CASH
      FLOWS FROM INVESTING ACTIVITIES:(Purchase)/sale
      of land, building and equipment
                  
                  
                  3,267
                  
                  
                  
                  (2,501,623
                  )Net
      cash (used in)/provided by investing activities
                  
                  
                  3,267
                  
                  
                  
                  (2,501,623
                  )CASH
      FLOWS FROM FINANCING ACTIVITIES:Dividends
      paid (preferred stock)
                  
                  
                  (110,152
                  )
                  
                  
                  -Principal
      payments on capital lease obligations
                  
                  
                  (2,028
                  )
                  
                  
                  (9,049
                  )Net
      cash used in financing activities
                  
                  
                  (112,180
                  )
                  
                  
                  (9,049
                  )Net
      decrease in cash and cash equivalents
                  
                  
                  (2,231,511
                  )
                  
                  
                  (6,959,347
                  )Cash
      and cash equivalents, beginning of period
                  
                  
                  15,467,386
                  
                  
                  
                  14,981,192Cash
      and cash equivalents, end of period
                  
                  $
                  13,235,875
                  
                  
                  $
                  8,021,845




- 4
-





APPLIED
ENERGETICS, INC.


NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS


June 30,
2009


(Unaudited)





1.
            BASIS
      OF PRESENTATION





The
accompanying interim unaudited condensed consolidated financial statements
include the accounts of Applied Energetics, Inc. and its wholly owned
subsidiaries, Ionatron Technologies, Inc. and North Star Power Engineering, Inc.
as of June 30, 2009 (collectively, "company," "Applied Energetics," "we," "our"
or "us").  All intercompany balances and transactions have been
eliminated.  In the opinion of management, all adjustments (which
include normal recurring adjustments) necessary for a fair presentation of the
results for the interim periods presented have been made.  The results
for the six-month period ended June 30, 2009, may not be indicative of the
results for the entire year.  The interim unaudited condensed
consolidated financial statements should be read in conjunction with the
company's audited consolidated financial statements contained in our Annual
Report on Form 10-K.  Our lack of earnings history and continued
future losses could adversely affect our financial position and prevent us from
fulfilling our contractual obligations, and if we are unable to generate funds
or obtain funds on acceptable terms, we may not be able to develop and market
our present and future products.





The
following unaudited condensed financial statements are presented pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the company believes that the disclosures made are adequate to make the
information not misleading.





The FASB
has issued SFAS No. 168, “The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles” (ASC
105-10).  SFAS 168 is intended to replace Statement 162 “The Hierarchy
of Generally Accepted Accounting Principles”, and to establish the FASB
Accounting Standards Codification as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with
GAAP.  Rules and interpretive releases of the SEC under federal
securities laws are also sources of authoritative GAAP for SEC
registrants.  This statement is effective for interim reporting
periods ending after September 15, 2009.  The adoption of the standard
is not expected to have a significant impact on the company’s consolidated
financial statements.





USE
OF ESTIMATES





The
preparation of consolidated financial statements in conformity with United
States Generally Accepted Accounting Principles (“GAAP”) requires management to
make estimates, judgments and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Management bases its
assumptions on historical experiences and on various other estimates that it
believes to be reasonable under the circumstances, the results of which form the
basis for making judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources.  In addition,
management considers the basis and methodology used in developing and selecting
these estimates, the trends in and amounts of these estimates, specific matters
affecting the amount of and changes in these estimates, and any other relevant
matters related to these estimates, including significant issues concerning
accounting principles and financial statement presentation.  Such
estimates and assumptions could change in the future, as more information
becomes known which could impact the amounts reported and disclosed
herein.  Significant estimates include revenue recognition under the
percentage of completion method of contract accounting, estimate to forecast
loss on a contract under the completed contract method of accounting, the
valuation of inventory, and estimate to forecast expected forfeiture rate on
stock-based compensation.





CASH
AND CASH EQUIVALENTS





At June
30, 2009, we had approximately $13.2 million of cash and cash
equivalents.   Our cash position decreased during the
first  six months of 2009 by approximately $2.2 million, of which
operating activities used $2.1 million.





We
anticipate that short-term and long-term funding needs will be provided by the
cash flows from current and future contracts and existing cash and cash
equivalents.  We determined that we have sufficient working capital to
fulfill existing contracts and expected contracts in 2009 and 2010.





FAIR
VALUE OF FINANCIAL ASSETS





The
carrying amount of accounts receivable, accounts payable, and accrued expenses
approximate fair value due to the short maturity of these
instruments.


- 5
-




APPLIED
ENERGETICS, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)


2.
            ACCOUNTS
      RECEIVABLE





Accounts
receivable consists of the following:





June 30, 2009
                    
                    
                    December 31, 2008Contracts
      receivable
                    
                    $
                    1,158,831
                    
                    
                    $
                    1,677,929Costs
      and estimated earnings on uncompleted contracts
                    
                    
                    23,639
                    
                    
                    
                    1,049,924Accounts
      receivable
                    
                    
                    1,182,470
                    
                    
                    
                    2,727,853Other
      receivable
                    
                    
                    269,032
                    
                    
                    
                    4,3951,451,502
                    
                    
                    
                    2,732,248Less:Allowance
      for doubtful accounts
                    
                    
                    -
                    
                    
                    
                    -Total
                    
                    $
                    1,451,502
                    
                    
                    $
                    2,732,248Long
      term receivable, net (contract retention)
                    
                    
                    -
                    
                    
                    
                    253,130$
                    1,451,502
                    
                    
                    $
                    2,985,377





Contracts
receivable at June 30, 2009 and December 31, 2008 are expected to be collected
within a year.




Costs and
Estimated Earnings on Uncompleted Contracts


June 30, 2009
                          
                          
                          December 31, 2008Costs
      incurred on uncompleted contracts
                          
                          $
                          22,156,742
                          
                          
                          $
                          20,118,499Estimated
      earnings
                          
                          
                          1,655,544
                          
                          
                          
                          1,564,814Total
      billable costs and estimated earnings
                          
                          
                          23,812,286
                          
                          
                          
                          21,683,313Less:Billings
      to date
                          
                          
                          23,810,180
                          
                          
                          
                          20,633,389Total
                          
                          $
                          2,106
                          
                          
                          $
                          1,049,924Included
      in accompanying balance sheet:Unbilled
      costs and estimated earnings on uncompleted contracts included in accounts
      receivable
                          
                          $
                          23,639
                          
                          
                          $
                          1,049,924Billings
      in excess of costs and estimated earnings on uncompleted
      contracts
                          
                          
                          (21,533
                          )
                          
                          
                          -Total
                          
                          $
                          2,106
                          
                          
                          $
                          1,049,924


- 6
-




APPLIED
ENERGETICS, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)


3.         INVENTORY





Our
inventories consist of the following:





June 30, 2009
                    
                    
                    December 31, 2008Raw
      materials
                    
                    $
                    95,527
                    
                    
                    $
                    124,849Work-in-process
                    
                    
                    175,479
                    
                    
                    
                    32,340Total
                    
                    $
                    271,006
                    
                    
                    $
                    157,189





4.         PROPERTY
AND EQUIPMENT





Our property and equipment consist of the following:





June 30, 2009
                  
                  
                  December 31, 2008Land
      and buildings
                  
                  $
                  2,072,214
                  
                  
                  $
                  2,072,215Equipment
                  
                  
                  2,740,123
                  
                  
                  
                  3,214,640Furniture
      and building improvements
                  
                  
                  973,390
                  
                  
                  
                  1,107,245Software
                  
                  
                  875,298
                  
                  
                  
                  787,331Total
                  
                  
                  6,661,025
                  
                  
                  
                  7,181,431Less
      accumulated depreciation and amortization
                  
                  
                  (3,611,243
                  )
                  
                  
                  (3,657,790
                  )Net
      property and equipment
                  
                  $
                  3,049,782
                  
                  
                  $
                  3,523,641





Periodically,
we evaluate general impairment of assets.  As an element of our annual
business planning process conducted in the fourth quarter of each year, we
consider expected revenues and resulting cash flow from operations. Revenue
planning is based upon actual and expected contract awards as the majority of
our revenues are sourced from Government contracts. During this process, we
evaluate the current carrying values of all long-lived assets on our books.
 We compare these values against business plans to determine if carrying
values are recoverable.





Our most
recent asset impairment test was performed on February 18, 2009, when we
determined that as of December 31, 2008 the net book values of long-lived assets
were recoverable through expected undiscounted business cash flows based on
anticipated and actual future revenue bookings and backlog. We will continue to
evaluate the carrying values in the future.  We evaluate impairments as
such circumstances warrant.





During
the second quarter of 2009, we elected to close our St. Louis, Missouri
operations.  Resulting from this decision, we wrote down $93,000 in
leasehold improvements and equipment no longer useful to the
company.


- 7
-




APPLIED
ENERGETICS, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)


5.
            SHARE-BASED
      COMPENSATION





Share-Based Compensation –
Employees, Directors and Non-Employees





For the
three months ended June 30, 2009 and 2008, share-based compensation expense
totaled $221,000 and $953,000, respectively.  For the six months ended
June 30, 2009 and 2008, share-based compensation expense totaled $1.1 million
and $2.3 million, respectively.





There was
no related income tax benefit recognized because our deferred tax assets are
fully offset by a valuation allowance.





During
the six months ended June 30, 2009, we granted 136,500 shares of restricted
stock to one newly hired employee and three non-employee consultants, which vest
up to 3 years.  The weighted average fair value of the restricted
stock grants of $0.37 per share is being expensed over the requisite service
period.  During the six months ended June 30, 2009, we granted options
to purchase an aggregate of 800,000 shares of our common stock in connection
with a contract extension to Dana Marshall, our then President, Chief Executive
Officer and Chairman of the Board.  These options have a weighted
average exercise price of $0.50.  Subject to the individual option
agreements, all of the options granted to Mr. Marshall expired unexercised on
June 30, 2009.





On April
23, 2009, we granted options to purchase an aggregate of 635,000 shares of our
common stock to various members of the board with a weighted average exercise
price of $0.50.  These options vested immediately.  On June
16, 2009, we granted options to purchase an aggregate of 100,000 shares of our
common stock to Messrs. Mark J. Lister and John F. Levy upon their election to
the board of directors.  These options have a weighted average
exercise price of $0.45, and vested immediately.





The
compensation committee determined to offer employees the right to exchange their
“out of the money” options for new six-year, fully vested options with an
exercise price of $0.50 per share.  In connection with the exchange
offer, which was completed on March 9, 2009, employees and members of the board
were offered the right to exchange two existing options for one new
option.  In the exchange offer, the company issued 1,751,269 new
options in exchange for 3,502,536 old, 2004 Plan options.  The
associated non-cash expense for this exchange was approximately
$400,000.





On March
31, 2009, the company and Dana A. Marshall entered into a separation agreement
(the “Separation Agreement”) pursuant to which Mr. Marshall no longer serves as
President, Chief Executive Officer or Chairman of the Board. Pursuant to the
terms of the Separation Agreement, Mr. Marshall has received a $135,000 lump sum
payment and will receive twelve (12) monthly payments of $29,167.  In
addition, the company agreed to accelerate the vesting of 137,500 unvested
shares of restricted stock and unvested options to purchase 800,000 shares of
common stock.  As such, all of Mr. Marshall’s equity awards were
modified pursuant to the SFAS No. 123(R), “Share-Based Payment” (ASC 718), and
all appropriate charges have been expensed.  Subject to the individual
option agreements, all of the options granted to Mr. Marshall expired
unexercised on June 30, 2009.





The
weighted average grant-date fair value of all outstanding option grants was
$0.10 and $1.36, per share, for the six months ended June 30, 2009 and 2008,
respectively.  We determine the fair value of share-based awards at
their grant date, using a Black-Scholes Option-Pricing Model applying the
assumptions in the following table.





Six Months Ended June 30,2009
                  
                  
                  2008Expected
      life (years)
                  
                  3.41
      years
                  
                  
                  4
      yearsDividend
      yield
                  
                  
                  0.0
                  %
                  
                  
                  0.0
                  %Expected
      volatility
                  
                  
                  67.3
                  %
                  
                  
                  65.0
                  %Risk
      free interest rates
                  
                  
                  1.3
                  %
                  
                  
                  2.4
                  %Weighted
      average fair value of options at grant date
                  
                  $
                  0.10
                  
                  
                  $
                  2.20





During
the six months ended June 30, 2009, 457,427 shares of restricted stock vested
and 219,784 shares of restricted stock were forfeited, no options were
exercised, 3,902,536 options were forfeited and 1,753,437 options
expired.  The forfeited options include the options exchanged as a
result of the tender offer exchange.  As of June 30, 2009, $790,000 of
total unrecognized compensation cost, net of estimated forfeiture, related to
restricted stock is expected to be recognized over a weighted average period of
approximately 1.24 years.  Due to the exchange offer and forfeitures,
all expense for outstanding options has been included in current or prior
Statements of Operations as per SFAS No. 123(R) (ASC 718).


- 8
-




APPLIED
ENERGETICS, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)


Warrants –
Non-Employees





At June
30, 2009 and December 31, 2008 there were outstanding warrants to purchase
approximately 1.1 million shares of common stock, respectively, which were
either (i) issued in connection with the August 2006 financing, or (ii) issued
to outside consultants.  The exercise price of these warrants range
from $6.30 to $12.00.





6.       COMPREHENSIVE
LOSS





Total
comprehensive loss consisted of the following:





Three Months Ended June 30,
                
                
                Six Months Ended June 30,2009
                
                
                2008
                
                
                2009
                
                
                2008Comprehensive
      LossNet
      loss
                
                $
                (3,223,417
                )
                
                $
                (819,318
                )
                
                $
                (6,197,865
                )
                
                $
                (4,115,797
                )Other
      comprehensive loss:Unrealized
      gain (loss) on available-for-sale securities
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (375,000
                )Total
                
                $
                (3,223,417
                )
                
                $
                (819,318
                )
                
                $
                (6,197,865
                )
                
                $
                (4,490,797
                )





7.        SIGNIFICANT
CUSTOMERS





Approximately
95% and 96% of revenues for the three-month periods and 98% and 94% of revenues
for the six-month periods ended June 30, 2009 and 2008, respectively, were
generated from either the U.S. Government or contractors to the U.S.
Government.  Five percent of 2009 revenues for the three-month period
and two percent of our 2009 revenue for the six-month period were generated from
customers within the aerospace, high-voltage and technology
industries.  Four percent of 2008 revenues for the three-month period
and six percent of our 2008 revenue for the six-month period were generated from
customers within the aerospace, high-voltage and technology
industries.





8.
            NET
      LOSS PER SHARE





Basic net
loss per common share is computed by dividing net loss available to common
shareholders by the weighted average number of common shares outstanding during
the period before giving effect to stock options, stock warrants, restricted
stock units and convertible securities outstanding, which are considered to be
dilutive common stock equivalents.  Diluted net loss per common share
is calculated based on the weighted average number of common and potentially
dilutive shares outstanding during the period after giving effect to convertible
preferred stock, stock options, warrants and restricted stock units.
Contingently issuable shares are included in the computation of basic loss per
share when issuance of the shares is no longer contingent. Due to the net loss
for the six months ended June 30, 2009 and 2008, basic and diluted loss per
common share were the same, as the effect of potentially dilutive securities
would have been anti-dilutive.


- 9
-




APPLIED
ENERGETICS, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)


Potentially
dilutive securities not included in the diluted loss per share calculation, due
to net losses from continuing operations, were as follows:





For the Three and Six Months
                    Ended June 30,2009
                  
                  
                  2008Options
      to purchase common shares
                  
                  
                  2,517,832
                  
                  
                  
                  4,893,661Warrants
      to purchase common shares
                  
                  
                  1,091,605
                  
                  
                  
                  1,141,605Unvested
      restricted stock grants
                  
                  
                  443,466
                  
                  
                  
                  1,137,167Convertible
      preferred stock
                  
                  
                  135,572
                  
                  
                  
                  690,000Total
      potentially dilutive securities
                  
                  
                  4,188,475
                  
                  
                  
                  7,862,433





9.
            DIVIDENDS





As of
June 30, 2009, we had 135,572 shares of our 6.5% Series A Convertible Preferred
Stock outstanding.  A dividend was declared and paid in cash
(approximately $55,000) on August 1, 2009 to the holders of record as of July
15, 2009.





Dividends
on Preferred Stock are accrued when the amount and kind of the dividend is
determined and  are payable quarterly on the first day of February,
May, August and November, in cash or shares of common stock, at the discretion
of the company.





10.
            COMMITMENTS
      AND CONTINGENCIES





LITIGATION





In July
2006, two class action complaints were filed by George Wood and Raymond Deedon
against Applied Energetics, Inc. (formerly Ionatron, Inc.) and its founders.
Each of the class actions was filed in the United States District Court for the
District of Arizona and alleges, among other things, violations of Section 10(b)
of the Securities Exchange Act of 1934 and Rule 10b-5, claiming that we issued
false and misleading statements concerning the development of our counter-IED
product. The court consolidated these cases, and a consolidated amended
complaint was served. The action has been dismissed against Joseph C. Hayden and
Stephen W. McCahon with prejudice, and is proceeding against us and the
remaining defendants. In July 2009, we reached an agreement with the lead
plaintiffs to settle the consolidated class action lawsuits.





Under the
terms of the proposed settlement of the class action lawsuits, those lawsuits
will be dismissed with prejudice, and Applied Energetics and all other
defendants will receive a full and complete release of all claims asserted
against them in the litigation, in exchange for the payment of an aggregate of
$5.3 million in cash and the issuance of previously unissued shares of common
stock by Applied Energetics valued at $1.2 million, provided that the number of
shares of common stock to be issued will not exceed 4 million shares. There is
no admission of liability by any of the defendants.





In
September 2006, a derivative action was filed by John T. Johnasen in Arizona
State Court, Pima County, against certain of our current and former officers and
directors, alleging, among other things, breach of fiduciary duty. On April 30,
2008, the state court continued a stay of the derivative action until 30 days
notice from either party or until further court order terminating the stay. In
July 2009, we reached an agreement to settle the derivative action.





Under the
terms of the proposed settlement of the derivative action, the lawsuit will be
dismissed with prejudice, and all defendants will receive a full and complete
release of all claims asserted against them in the litigation, in exchange for
Applied Energetics’ maintenance of certain corporate governance measures and the
payment of an aggregate of $225,000 of attorneys’ fees. There is no admission of
liability by any of the defendants.





Insurance
proceeds of $6.2 million, less amounts reimbursed to Applied Energetics to pay
expenses of the litigations (approximately $700,000 to date), will be used to
fund the settlement payments and related costs. Settlement costs and estimated
expenses of the settlement have been reflected in the financial
statements.





The
settlements are subject to Court approval. Motions for preliminary approval of
the settlements, directing notice of the settlements and setting a date for a
settlement fairness hearing are currently being filed.


- 10
-




APPLIED
ENERGETICS, INC.
 NOTES TO
CONSOLIDATED FINANCIAL STATEMENTS
 June 30,
2009
 (Unaudited)


As stated
in the settlement documents, Applied Energetics denies any liability in
connection with the litigation and denies the claims asserted by the plaintiffs
in the complaints.





On June
29, 2009, Applied Energetics received notice from the American Arbitration
Association that an arbitration demand was filed against it and its subsidiary
North Star Power Engineering, Inc. ("NSPE") by eScrub Systems, Inc. The claim
asserts a breach of an October 27, 2003 License Agreement between eScrub and
North Star Research Corporation (whose assets were acquired by NSPE) relating to
certain power technology and seeks $1,000,000 in damages. eScrub asserts that
the agreement was improperly assigned to Applied Energetics and, alternatively,
that Applied Energetics breached the agreement by failing to exploit the
license. The claim also alleges misappropriation of trade secrets relating to
technology that eScrub asserts is not a subject of the License Agreement and
seeks an additional $1,350,000 in damages and an order enjoining the Company
from using the alleged trade secrets. We intend to vigorously defend the
claim.





In
addition, we may from time to time be involved in legal proceedings arising from
the normal course of business.  As of the date of this report, we have
not received notice of any other legal proceedings.





11.
            SUBSEQUENT
      EVENTS





On July
13, 2009, the Compensation Committee of the Board of Directors awarded options
to purchase approximately 2.7 million shares of common stock to
employees.  The grant date was July 16, 2009, the options are
exercisable at a price per share of $0.40, the closing sale price of the
Registrant’s common stock on July 16, 2009, and became exercisable as to
one-third of the shares covered thereby on July 16, 2009.  An additional
one-third of the shares covered will become exercisable on the second day
following the date on which the Registrant files its Quarterly Report for the
quarter ending June 30, 2010 and the remaining one-third of the shares covered
will become exercisable on the second day following the date on which the
Registrant files its Quarterly Report for the quarter ending June 30, 2011, and
expire on July 16, 2014.





On July
30, 2009, we received a $992,000 contract for the design, development and
delivery of a laser system to the U.S. Navy.  We will produce a
demonstration system specifically designed to explore USP laser effects and
determine requirements for deployment of USP lasers on U.S. Navy and U.S. Marine
Corps aircraft. The contract is incrementally funded in the amount of
$600,000, which is expected to cover expenses through 2009.  The
system is scheduled to be delivered to Naval Surface Warfare Center, Crane,
Indiana in twelve months.  The laser system will be developed and
tested at our facility in Tucson, Arizona under a subcontract for SAIC’s
engineering services contract with NSWC Crane, and then delivered to the
Navy.





In July,
2009, we reached agreements to settle the consolidated class action lawsuits and
the derivative action.  See note 10.





Subsequent
events have been evaluated through August 10, 2009, the date the financial
statements were available to be issued.


- 11
-





ITEM
2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS





Our
discussion and analysis of the financial condition and results of operations
should be read in conjunction with the unaudited condensed consolidated
financial statements and the related disclosures included elsewhere herein and
in Management’s Discussion and Analysis of Financial Condition and Results of
Operations included as part of our Annual Report on Form 10-K for the year ended
December 31, 2008.





CAUTIONARY
NOTE REGARDING FORWARD-LOOKING STATEMENTS





Certain
statements in this Quarterly Report on Form 10-Q constitute forward-looking
statements within the meaning of the securities laws.  Forward-looking
statements include all statements that do not relate solely to the historical or
current facts, and can be identified by the use of forward looking words such as
"may", "believe", "will", "expect", "expected", "project", "anticipate",
"anticipated”, “estimates", "plans", "strategy", "target", "prospects" or
"continue".  These forward looking statements are based on the current
plans and expectations of our management and are subject to a number of
uncertainties and risks that could significantly affect our current plans and
expectations, as well as future results of operations and financial condition
and may cause our actual results, performances or achievements to be materially
different from any future results, performances or achievements expressed or
implied by such forward-looking statements. Important factors that could cause
our actual results to differ materially from our expectations are described in
Item 1A.  (Risk Factors) of our Annual Report on Form 10-K for the
year ended December 31, 2008.  In making these forward-looking
statements, we claim the protection of the safe-harbor for forward-looking
statements contained in the Private Securities Reform Act of
1995.  Although we believe that the expectations reflected in such
forward-looking statements are reasonable, there can be no assurance that such
expectations will prove to have been correct.  We do not assume any
obligation to update these forward-looking statements to reflect actual results,
changes in assumptions, or changes in other factors affecting such
forward-looking statements.





OVERVIEW





Applied
Energetics is a developer and manufacturer of applied energy systems, primarily
for military applications, utilizing our proprietary knowledge of high
performance lasers, high-voltage electronics, advanced dynamic optics and
atmospheric and plasma energy interactions.  We apply these
technologies to deliver innovative solutions to urgent military missions,
including neutralizing improvised explosive devices (“IEDs”) among other high
priority missions of U.S. and allied military forces.  Additionally,
we develop and manufacture high-voltage and laser products for government and
commercial customers for a range of applications.





On March
28, 2009, James McDivitt, the then Lead Independent Director resigned from the
Board for personal reasons.  On March 31, 2009, we entered into a
separation agreement with Dana Marshall, resulting in Mr. Marshall no longer
serving as our Chief Executive officer, President, Director and Chairman of the
Board.  Pursuant to the terms of the Separation Agreement, Mr.
Marshall has received a $135,000 lump sum payment and will receive twelve (12)
monthly payments of $29,167.  In addition, we agreed to accelerate the
vesting of 137,500 unvested shares of restricted stock and unvested options to
purchase 800,000 shares of common stock, which options expired
unexercised.  On March 31, 2009, General James Feigley was appointed
non-executive Chairman of the Board.





On April
24, 2009, the Board approved a restructuring plan, which included the closing of
our St. Louis, Missouri operation and included a reduction in force of
22%.  In connection with this restructuring, Joseph Hayden was
appointed Chief Operating Officer and principal executive officer.





On June
17, 2009, the Board appointed Mark J. Lister and John F. Levy as Class I
Directors of Applied Energetics. The current term for Class I Directors expires
at the annual meeting of stockholders in 2011. Mr. Lister was appointed as a
member of the Compensation Committee of the Board of Directors of the Company
and Mr. Levy was appointed as a member of the Audit Committee of the Board of
Directors of the Company. The appointment of Mr. Levy to the Audit Committee as
its third independent director regained compliance with NASDAQ's Listing Rule
5605(c).





RECENT
ACCOUNTING PRONOUNCEMENTS





The
Financial Accounting Standards Board (“FASB”) has issued Statement of Financial
Accounting Standard (“SFAS”) No. 115-2 and FAS 124-2, “Recognition and
Presentation of Other-Than-Temporary Impairments” (ASC 320-10).  SFAS
115-2 and FAS 124-2 is intended to determine whether the holder of an investment
in a debt or equity security for which changes in fair value are not regularly
recognized in earnings (such as securities classified as held-to-maturity or
available-for-sale) should recognize a loss in earnings when the investment is
impaired.  An investment is impaired if the fair value of the
investment is less than its amortized cost basis. This statement is effective
for interim reporting periods ending after June 15, 2009.  The
adoption of the standard is not expected to have a significant impact on the
company’s consolidated financial statements.


- 12
-





The FASB
has issued SFAS No. 157-4, “Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly” (ASC 820-10).  SFAS 157-4 is
intended to provide additional guidance as to how to determine whether a market
for a financial asset that historically was active became no longer active and
whether a transaction is not orderly. This statement is effective for interim
reporting periods ending after June 15, 2009.  The adoption of the
standard is not expected to have a significant impact on the company’s
consolidated financial statements.





The FASB
has issued SFAS No. 165, “Subsequent Events” (ASC 855-10).   SFAS
165 is intended to introduce the concept of financial statements being available
to be issued.  It requires the disclosure of the date through which an
entity has evaluated subsequent events and whether that date represents the date
the financial statements were issued or were available to be
issued.  This statement is effective for interim reporting periods
ending after June 15, 2009.  The adoption of the standard is not
expected to have a significant impact on the company’s consolidated financial
statements.





The FASB
has issued SFAS No. 168, “The FASB Accounting Standards Codification and the
Hierarchy of Generally Accepted Accounting Principles” (ASC
105-10).  SFAS 168 is intended to replace Statement 162 “The Hierarchy
of Generally Accepted Accounting Principles”, and to establish the FASB
Accounting Standards Codification as the source of authoritative accounting
principles recognized by the FASB to be applied by nongovernmental entities in
the preparation of financial statements in conformity with
GAAP.  Rules and interpretive releases of the SEC under federal
securities laws are also sources of authoritative GAAP for SEC
registrants.  This statement is effective for interim reporting
periods ending after September 15, 2009.  The adoption of the standard
is not expected to have a significant impact on the company’s consolidated
financial statements.





RESULTS
OF OPERATIONS





COMPARISON
OF OPERATIONS FOR THE THREE MONTHS ENDED JUNE 30, 2009 AND 2008:





2009
                    
                    
                    
                    2008Revenue
                    
                    $
                    1,730,141
                    
                    
                    $
                    5,677,998Cost
      of revenue
                    
                    
                    1,631,316
                    
                    
                    
                    5,189,454General
      and administrative
                    
                    
                    2,825,062
                    
                    
                    
                    1,157,277Selling
      and marketing
                    
                    
                    191,001
                    
                    
                    
                    72,854Research
      and development
                    
                    
                    322,986
                    
                    
                    
                    243,272Other
      (expense) income:Interest
      expense
                    
                    
                    -
                    
                    
                    
                    (239
                    )Interest
      income
                    
                    
                    16,807
                    
                    
                    
                    165,780Net
      loss
                    
                    $
                    (3,223,417
                    )
                    
                    $
                    (819,318
                    )





REVENUE





Revenue
decreased approximately $3.9 million for the three months ended June 30, 2009
compared to the three months ended June 30, 2008, which was attributable to a
decrease in revenue from Counter-IED projects of approximately $3.2 million, and
from LGE projects of approximately $600,000.  In addition, there was a
reduction in revenue on High Voltage projects of $100,000.





COST
OF REVENUE





Cost of
revenue decreased approximately $3.6 million compared to the three months ended
June 30, 2008, which was in line with the decrease in revenues of 70% for the
same period. Cost of revenue includes manufacturing labor, fringe and overhead,
and an allocation of allowable general and administration and research and
development costs in accordance with the terms of our government
contracts.


- 13
-




GENERAL
AND ADMINISTRATIVE





General
and administrative expenses increased approximately $1.7 million for the three
months ended June 30, 2009 compared to the three months ended June 30,
2008.  Because of lower government contract activities, applied labor
and overheads not allocated to government contracts increased general and
administrative costs by $1.6 million.  The settlement of the class
action and derivative lawsuits caused an increase of $1.1 million. Facility exit
costs for the St. Louis, Missouri office increased general and administrative
costs by $173,000.  Non-cash employee compensation decreased by
$755,000, salaries, benefits and temporary help decreased by $344,000, which is
a result of reduced headcount of $596,000, offset by separation expenses of
approximately $246,000. Travel and related expenses decreased by $83,000,
operational expenses decreased by $70,000, depreciation and amortization
decreased by $48,000.





SELLING
AND MARKETING





Selling
and marketing expenses increased approximately $118,000 for the three months
ended June 30, 2009 from the same period in 2008, reflecting increased
allocation of time of existing personnel and costs associated with business
development, professional conferences and exhibitions, marketing literature, and
updated web content.





RESEARCH
AND DEVELOPMENT





Internal
research and development expenses increased approximately $80,000 during the
three months ended June 30, 2009 as compared to the same period in 2008. The
increase is related to the continuation of development of proprietary high
voltage and laser technologies.





Our
short-term research and development goals are to develop innovative laser
sources, novel high-voltage electrical products, efficient optical systems to
extend the range of our LGE system and to engineer laser hardware to be more
compact and rugged as an essential element of moving our LGE technology to be
practical for fielding.  Longer-term research objectives include
development of  tunable and eye safe laser sources to improve safety
and utility of LGE, adjunct military  and commercial applications for
lasers to expand accessible markets for our technology, and integrated weapon
and counter-weapon system technologies to facilitate our role as an integrated
system provider.





INTEREST
INCOME AND INTEREST EXPENSE





Net
interest income for the three months ended June 30, 2009 was lower by
approximately $149,000 from the same period of 2008 primarily due to the lower
balance of invested funds and lower interest rates on our investments in
2009.





NET
LOSS





Our
operations for the three months ended June 30, 2009 resulted in a net loss of
approximately $3.2 million, an increase of approximately $2.4 million compared
to the $819,000 loss for the same period in 2008.





COMPARISON
OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2009 AND 2008:





2009
                    
                    
                    2008Revenue
                    
                    $
                    4,317,539
                    
                    
                    $
                    7,639,088Cost
      of revenue
                    
                    
                    4,032,763
                    
                    
                    
                    6,929,562General
      and administrative
                    
                    
                    5,260,785
                    
                    
                    
                    4,522,741Selling
      and marketing
                    
                    
                    429,024
                    
                    
                    
                    111,438Research
      and development
                    
                    
                    840,647
                    
                    
                    
                    605,210Other
      (expense) income:Interest
      expense
                    
                    
                    (19
                    )
                    
                    
                    (1,552
                    )Interest
      income
                    
                    
                    47,834
                    
                    
                    
                    415,608Other
                    
                    
                    -
                    
                    
                    
                    10Net
      loss
                    
                    $
                    (6,197,865
                    )
                    
                    $
                    (4,115,797
                    )


- 14
-


REVENUE





Revenue
decreased approximately $3.3 million for the six months ended June 30, 2009
compared to the six months ended June  30, 2008, which was
attributable to decreases in revenue from Counter-IED projects of approximately
$2.5 million, from LGE projects of approximately $500,000 and a reduction in
revenue on High Voltage projects of $300,000.





COST
OF REVENUE





Cost of
revenue decreased approximately $2.9 million for the six months ended June 30,
2009 compared to the six months ended June 30, 2008, which was in line with the
decrease in revenues of 43% for the same period. Cost of revenue includes
manufacturing labor, fringe and overhead, and an allocation of allowable general
and administration and research and development costs in accordance with the
terms of our government contracts.





GENERAL
AND ADMINISTRATIVE





General
and administrative expenses increased by approximately $738,000 for the six
months ended June 30, 2009 compared to the six months ended June 30,
2008.  Non-cash employee compensation decreased by $1.2 million,
salaries, benefits and temporary help decreased by $419,000, which is a result
of reduced headcount expenses of $1.0 million offset by separation expenses of
approximately $596,000. Travel and related expenses decreased by $133,000,
operational expenses decreased by $121,000, depreciation and amortization
decreased by $91,000.  Offsetting these reductions are increases in
general and administrative costs of $1.1 million associated with the settlement
of the class action and derivative lawsuits, and due to lowered government
contract activities, $1.4 million in applied labor and overheads not allocated
to government contracts.  Facility exit costs for the St. Louis,
Missouri office increased general and administrative costs by
$173,000.





SELLING
AND MARKETING





Selling
and marketing expenses increased approximately $318,000 for the six months ended
June 30, 2009 from the same period in 2008, reflecting increased allocation of
time of existing personnel and costs associated with business development,
professional conferences and exhibitions, marketing literature, and updated web
content.





RESEARCH
AND DEVELOPMENT





Internal
research and development expenses increased approximately $235,000 during the
six months ended June 30, 2009 as compared to the same period in 2008. The
increase is related to the continuation of development of proprietary high
voltage and laser technologies.





Our
short-term research and development goals are to develop innovative laser
sources, novel high-voltage electrical products, efficient optical systems to
extend the range of our LGE system and to engineer laser hardware to be more
compact and rugged as an essential element of moving our LGE technology to be
practical for fielding.  Longer-term research objectives include
development of  tunable and eye safe laser sources to improve safety
and utility of LGE, adjunct military  and commercial applications for
lasers to expand accessible markets for our technology, and integrated weapon
and counter-weapon system technologies to facilitate our role as an integrated
system provider.





INTEREST
INCOME AND INTEREST EXPENSE





Net
interest income for the six months ended June 30, 2009 was lower by
approximately $368,000 from the same period of 2008 primarily due to the lower
balance of invested funds and lower interest rates on our investments in
2009.





NET
LOSS





Our
operations for the six months ended June 30, 2009 resulted in a net loss of
approximately $6.2 million, an increase of approximately $2.1 million compared
to the $4.1 million loss for the same period of 2008.


- 15
-


LIQUIDITY
AND CAPITAL RESOURCES





At June
30, 2009, we had approximately $13.2 million of cash and cash
equivalents.  Our cash position decreased during the first six months
of 2009 by approximately $2.2 million.  During the first six months of
2009, we used $2.1 million of cash in operating activities, which is comprised
of our net loss of $6.2 million, plus adjustments in non-cash share-based
compensation expense of $1,083,000, depreciation and amortization of $389,000,
loss on equipment disposal of $106,000 and provision for losses on projects of
$22,000.  Changes in assets and liabilities that provided cash include
a decrease in accounts receivable of $1.5 million, in prepaid expenses and
deposits of $307,000, in long-term receivables of $253,000, and in billings in
excess of costs of $22,000.  Changes in assets and liabilities that
used cash were a decrease in accounts payable of $454,000, increases in other
receivables of $307,000 and in inventory of $234,000.





As part
of our total cash use during the first six months of 2009, investment activities
provided approximately $3,000.  Financing activities used
approximately $112,000, primarily from the preferred stock cash dividends paid
in February and May, 2009.





We
anticipate that short-term and long-term funding needs will be provided by the
cash flows from current and future contracts and existing cash and cash
equivalents.  We determined that we have sufficient working capital to
fulfill existing contracts and expected contracts in 2009 and
2010.  On July 30, 2009, we received a $992,000 contract (currently
funded in the amount of $600,000) for the design, development and delivery of a
laser system to the U.S. Navy.





BACKLOG
OF ORDERS





At June
30, 2009, we had a backlog (workload remaining on signed contracts) of
approximately $2.2 million to be completed within the next twelve
months.  As of August 6, 2009, our backlog was $2.8
million.  The backlog does not include proposals and contracts under
negotiation at June 30, 2009.


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ITEM
4.  CONTROLS AND PROCEDURES





EVALUATION
OF DISCLOSURE CONTROLS AND PROCEDURES





Our
management, with the participation of our Principal Executive Officer and Chief
Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures as of June 30, 2009.  Based on that evaluation, our Principal
Executive Officer and Chief Financial Officer have concluded that our disclosure
controls and procedures are effective to ensure that information required to be
disclosed by us in reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in Securities and Exchange Commission rules and
forms.





During
the six months ended June 30, 2009, there was no significant change in our
internal controls over financial reporting that has materially affected or which
is reasonably likely to materially affect our internal controls over
financial reporting.


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PART
II – OTHER INFORMATION





ITEM
1.  LEGAL PROCEEDINGS





In July,
2009, we reached agreements to settle the consolidated class action lawsuits and
the derivative action.  Under the terms of the proposed settlement of
the derivative action, the lawsuit will be dismissed with prejudice, and all
defendants will receive a full and complete release of all claims asserted
against them in the litigation, in exchange for Applied Energetics’ maintenance
of certain corporate governance measures and the payment of an aggregate of
$225,000 of attorneys’ fees. There is no admission of liability by any of the
defendants.





Insurance
proceeds of $6.2 million, less amounts reimbursed to Applied Energetics to pay
expenses of the litigations (approximately $700,000 to date), will be used to
fund the settlement payments and related costs. Any remaining cash payments and
the stock issuance will be made by Applied Energetics.





The
settlements are subject to Court approval. Motions for preliminary approval of
the settlements, directing notice of the settlements and setting a date for a
settlement fairness hearing are currently being filed.





As stated
in the settlement documents, Applied Energetics denies any liability in
connection with the litigation and denies the claims asserted by the plaintiffs
in the complaints.





ITEM
6.        EXHIBITS





EXHIBIT
                                NUMBER
                              
                              DESCRIPTION31.1
                              
                              Certification
      of Principal Executive Officer pursuant to Rule 13a-14 or 15d-14 of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.31.2
                              
                              Certification
      of Chief Financial Officer pursuant to Rule 13a-14 or 15d-14 of the
      Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the
      Sarbanes-Oxley Act of 2002.32.1
                              
                              Principal
      Executive Officer Certification pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.32.2
                              
                              Chief
      Financial Officer Certification pursuant to 18 U.S.C. Section 1350, as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002.


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SIGNATURES




Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.




APPLIED
ENERGETICS, INC.





By
              /s/ Joseph C. HaydenJoseph C. HaydenChief Operating Officer and Principal Executive Officer





Date:  August
10, 2009


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